journal entry example

Example 1: Financing Activities

Owner invested $10,000 in the company.

Analysis of Transaction

Steps Debit or Credit ?

1 Increase in Assets (Cash) by $10,000 Debit2 Increase in Owner's Equity by $10,000 Credit

Journal Entry Debit CreditCash 10,000

Owner's Equity 10,000

Description of Journal EntryOwner invested $10,000 in the company.

Results of Journal EntryCash balance increases by $10,000. --> Increase in AssetsOwner's Equity balance increases by $10,000. --> Increase in Owner's Equity

Example 2: Financing Activities

The company borrowed $20,000 from a bank.



1 Increase in Assets (Cash) by $20,000 Debit2 Increase in Liabilities (Borrowings) by $20,000 Credit

Journal EntryDebit Credit

Cash 20,000 Borrowings 20,000

Description of Journal EntryBorrowed $20,000.

Results of Journal EntryCash balance increases by $20,000. --> Increase in AssetsBorrowings balance increases by $10,000. --> Increase in Liabilities

Example 3: Investing Activities

The company purchased $12,000 equipment and paid in cash.



1 Increase in Assets (Equipment) by $12,000 Debit2 Decrease in Assets (Cash) by $12,000 Credit

Journal Entry Debit CreditEquipment 12,000

Cash 12,000

Description of Journal EntryPurchased $12,000 equipment in cash.

Results of Journal EntryEquipment balance increases by $12,000. --> Increase in AssetsCash balance decreases by $12,000. --> Decrease in Assets

Example 4: Operating Activities

The company purchased $6,000 merchandise (600 units) on credit.



1 Increase in Assets (Merchandise) by $6,000 Debit2 Increase in Liabilities (Accounts Payable) by $6,000 Credit

Journal Entry Debit CreditMerchandise 6,000

Accounts Payable 6,000

Description of Journal EntryPurchased $6,000 merchandise on credit.

Results of Journal EntryMerchandise balance increases by $6,000. --> Increase in AssetsAccounts Payable balance increases by $6,000. --> Increase in Liabilities


The company sold 500 units of merchandise at the price of $11,000. Customer paid $9,000 in cash at the time of sale.

Analysis of Transaction Note: This transaction includes both "REVENUE" and "EXPENSE" components.

(1) REVENUE side


1 Increase in Assets (Cash) by $9,000 Debit2 Increase in Assets (Accounts Receivable) by $2,000 Debit3 Increase in Revenue (Sales) by $11,000 Credit

(2) EXPENSE side


1 Increase in Expenses (Cost of Merchandise Sold) by $5,000($6,000 / 600 units = $10 per unit)($10 per unit X 500 units sold = $5,000 cost)

Debit

2 Decrease in Assets (Merchandise) by $5,000 Debit

(1) REVENUE Journal Entry Debit CreditCash 9,000Accounts Receivable 9,000

Sales Revenue 11,000 Description of Journal Entry

Sold merchandise at $11,000 price and received $9,000 in cash.

Results of Journal EntryCash balance increases by $9,000. --> Increase in AssetsAccounts Receivable balance increases by $2,000. --> Increase in AssetsSales Revenue account balance increases by $11,000. --> Increase in Revenue

(2) EXPENSE Journal Entry

Debit CreditCost of Merchandise Sold 5,000

Merchandise 5,000

Description of Journal Entry To record the cost of merchandise sold.

Results of Journal EntryMerchandise balance decreases by $5,000. --> Decrease in AssetsCost of Merchandise Sold account balance increases by $5,000. --> Increase in Expense


The company paid $3,500 salaries.



1 Increase in Expenses (Salaries Expense) by $3,500 Debit2 Decrease in Assets (Cash) by $3,500 Credit

Journal Entry Debit CreditSalaries Expense 3,500

Cash 3,500

Description of Journal EntryPaid $3,500 salaries.

Results of Journal EntryCash balance decreases by $3,500. --> Decrease in AssetsSalaries Expense account balance increases by $3,500. --> Increase in Expenses


The company paid $1,500 rent.



1 Increase in Expenses (Rent Expense) by $1,500 Debit2 Decrease in Assets (Cash) by $1,500 Credit

Journal Entry Debit CreditRent Expense 1,500

Cash 1,500

Description of Journal EntryPaid $1,500 rent.

Results of Journal EntryCash balance decreases by $1,500. --> Decrease in AssetsRent Expense account balance increases by $1,500. --> Increase in Expenses

Summary of Transactions from previous file.

No. Date Transactions(1) May 1 Owner invested $20,000 in the company.

(2) May 3 Borrowed $10,000 from a bank.(3) May 6 Purchased $15,000 equipment in cash.(4) May 8 Purchased $9,000 merchandise (900 units) on credit.

(5) May 15 Sold 500 units of merchandise at the price of $11,000. Customer paid $8,000 in cash at the time of sale.

(6) May 25 Paid $2,500 salaries.(7) May 26 Paid $1,500 rent.

Summary of Journal Entries from previous file.

No. Journal Entries Debit Credit

(1) Cash 10,000(1) Owner's Equity 10,000

Owner invested $10,000 in the company.

(2) Cash 20,000(2) Borrowings 20,000

Borrowed $20,000.

(3) Equipment 12,000(3) Cash 12,000

Purchased $12,000 equipment in cash.

(4) Merchandise 6,000(4) Accounts Payable 6,000

Purchased $6,000 merchandise on credit.

(5)-1 Cash 9,000(5)-1 Accounts Receivable 2,000(5)-1 Sales 11,000

Sold merchandise at $11,000 price and received $9,000 in cash.

(5)-2 Cost of Goods Sold 5,000(5)-2 Merchandise 5,000

To record the cost of goods sold ($5,000 merchandise).

(6) Salaries Expense 2,500(6) Cash 3,500

Paid $2,500 salaries.

(7) Rent Expense 1,500(7) Cash 1,500

Paid $1,500 rent.

Balance Sheet and Income Statement Balance Sheet

As of May 31, 20XX

Assets Liabilities and Owner's EquityCash $ 23,000 Accounts Payable $ 6,000Accounts Receivable 2,000 Borrowings 20,000Merchandise 1,000 Equipment 12,000 Owner's Equity 12,000 (*1)

Total Assets $ 38,000 Total Liabilities and Owner's Equity

$ 38,000

Income StatementFor the Period from May 1 to May 31, 20XX

Revenue Sales $ 11,000Total Revenue $ 11,000 Expenses Cost of Goods Sold $ 5,000 Salaries Expense 2,500 Rent Expense 1,500Total Expenses 9,000

Net Income $ 2,000 (*2)

(*1) Owner's Equity=Investment by Owner+Net Income=$10,000+$2,000=$12,000(*2) Net Income = Total Revenue - Total Expenses = $11,000 - $9,000 = $2,000

Accounting Journal Entry Examples 01

* Cash payment transactions1. Purchase of assets in cash2. Repayment of liabilities in cash3. Payment of expenses in cash

* Cash receipt transactions4. Sale of assets in cash5. Borrowing money6. Issuance of stock

* Cash payment transactions1. Purchase of assets in cash1a. Purchased merchandise and paid $2,000 in cash1b. Purchased an equipment and paid $15,000 in cash

2. Repayment of liabilities in cash2a. Repaid $7,000 of bank loans2b. Paid $3,000 accounts payable

3. Payment of expenses in cash3a. Paid $3,500 rent expense3b. Paid $6,000 salaries expense

* Cash receipt transactions4. Sale of assets in cash4a. Sold merchandise and received $6,500 in cash The cost of merchandise sold was 5,1004b. Sold an equipment and received $8,600 in cash The book value of the equipment was $8,000

5. Borrowing money5a. Borrowed $9,000 in cash5b. Issued a promissory note and received $11,000 in cash

6. Issuance of stock6a. Issued 500 shares of common stock, at $50 per share6b. Issued 200 shares of preferred stock, at $80 per share

Cash payment transactions

1. Purchase of assets in cash

1a. Purchased merchandise and paid $2,000 in cash

debit credit

merchandise 2,000 cash 2,000

debit: increase in assets (merchandise)credit: decrease in assets (cash)

1b. Purchased an equipment and paid $15,000 in cash

debit credit

equipment 15,000 cash 15,000

debit: increase in assets (equipment)credit: decrease in assets (cash)

2. Repayment of liabilities in cash

2a. Repaid $7,000 of bank loans

debit credit

borrowings 7,000 cash 7,000

debit: decrease in liabilities (borrowings)

credit: decrease in assets (cash)

2b. Paid $3,000 accounts payable

debit credit

accounts payable 3,000 cash 3,000

debit: decrease in liabilities (accounts payable)credit: decrease in assets (cash)

3. Payment of expenses in cash

3a. Paid $3,500 rent expense

debit credit

rent expense 3,500 cash 3,500

debit: increase in expenses (rent expense)credit: decrease in assets (cash)

3b. Paid $6,000 salaries expense

debit credit

salaries expense 6,000 cash 6,000

debit: increase in expenses (salaries expense)credit: decrease in assets (cash)

Cash receipt transactions

4. Sale of assets in cash

4a. Sold merchandise and received $6,500 in cash

debit credit

cash 6,500 sales 6,500

debit: increase in assets (cash)credit: increase in revenue (sales)

The cost of merchandise sold was 5,100

debit credit

cost of goods sold 5,100 merchandise 5,100


4b. Sold an equipment and received $8,600 in cash

The book value of the equipment was $8,000

debit credit

cash 8,600 equipment 8,000 gain on sale of equipment

600


5. Borrowing money

5a. Borrowed $9,000 in cash

debit credit

cash 9,000 borrowings 9,000

debit: increase in assets (cash)credit: increase in liabilities (borrowings)

5b. Issued a promissory note and received $11,000 in cash

debit credit

cash 11,000 notes payable 11,000

debit: increase in assets (cash)credit: increase in liabilities (notes payable)

6. Issuance of stock

6a. Issued 500 shares of common stock, at $50 per share

debit credit

cash 25,000 Common stock 25,000

debit: increase in assets (cash)

credit: increase in equity (common stock)

6b. Issued 200 shares of preferred stock, at $80 per share

debit credit

cash 16,000 Preferred stock 16,000

debit: increase in assets (cash)credit: increase in equity (preferred stock)

Current assets are reported separately from noncurrent assetsCurrent liabilities are reported separately from noncurrent liabilities

Current assets--> Assets that are expected to be realized --> within a year or normal operating cycle, whichever is longer

Current liabilities--> Liabilities that are expected to liquidate--> within a year or normal operating cycle, whichever is longer

Regulation S-X: 17 CFR Part 210

Rule 5-02: Balance sheets

Current Assets5-02.1: Cash and cash items5-02.2: Marketable securities5-02.3: Accounts and notes receivable5-02.4: Allowances for doubtful accounts and notes receivable5-02.5: Unearned income5-02.6: Inventories5-02.7: Prepaid expenses5-02.8: Other current assets5-02.9: Total current assets

Noncurrent assets5-02.12: Other investments5-02.13: Property, plant and equipment5-02.14: Accumulated depreciation5-02.15: Intangible assets5-02.16: Amortization of intangible assets5-02.17: Other assets5-02.18: Total assets

Current liabilities5-02.19: Accounts and notes payable

http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&rgn=div5&view=text&node=17:2.0.1.1.8&idno=17#17:2.0.1.1.8.0.22.46

5-02.20: Other current liabilities5-02.21: Total current liabilities

Noncurrent liabilities5-02.22: Bonds, mortgages and other long-term debt5-02.24: Other liabilities5-02.25: Commitments and contingent liabilities

Stockholders' equity5-02.27: Redeemable preferred stocks5-02.28: Non-redeemable preferred stocks5-02.29: Common stocks5-02.30: Other stockholders' equity5-02.31: Noncontrolling interests5-02.32: Total liabilities and equity

Revenue Accounts 01Examples and Practice Questions

Revenue

1. Revenue is the increase in resources from the operations of an entity

2. Increase in resources may be (A), (B) or (C)(A) Increase in assets(B) Decrease in liabilities(C) Both (A) and (B)

Recognition of revenue

1. Recognition means "recording" in accounting2. Revenue is reported when it is recognized3. Revenue is recognized when it is earned and realized (or realizable)4. Realized means the collection of cash5. Earned means the delivery of products or services

Debits and credits

1. Revenue accounts have normal balances on the credit side

2. Increases in revenue accounts are recorded on the credit side3. Decrease in revenue accounts are recorded on the debit side

Examples of revenue accounts

Sales revenue

Services revenue Interest revenue Rent revenue

Practice Questions

1. On December 15, 2010Entity A sold 300 units of products at the price of $20 per unit

2. On December 15, 2010Entity A received $3,600 in cash

3. On January 27, 2011Entity A received $2,400 in cash

4. What is the amount revenue for 2010?300 units x $20 = $6,000

5. What is the balance of accounts receivable at December 31, 2010?$6,000 - $3,600 = $2,400

6. Prepare journal entries at the following dates(1) December 15, 2010(2) December 31, 2010(3) January 27, 2011

7. Journal entry at December 15, 2010

debit credit

Cash 3,600 Accounts receivable 2,400 Sales revenue 6,000

8. Journal entry at December 31, 2010--> No journal entry is required at December 31, 2010

9. Journal entry at January 27, 2011

debit credit

Cash 2,400 Accounts receivable 2,400

Equity

1. Equity represents the owners' equity

2. For corporations, shareholders are owners--> equity represents the shareholders' equity

3. Equity is a residual concept

--> equity is what's left after subtracting liabilities from assets

4. Equity = Assets - Liabilities

Components of equity

1. Paid-in capital--> the amount shareholders contributed to the entity--> in exchange of the shares of common stock or preferred stock

2. Retained earnings--> net income is accumulated in retained earnings--> dividends are paid from retained earnings

Debits and credits

1. Equity accounts have normal balances on the credit side

2. Increases in equity accounts are recorded on the credit side3. Decrease in equity accounts are recorded on the debit side

Practice Questions

1. Issuance of common stock

Entity A issued 8,000 shares of common stockPar value = $1 per shareIssue price = $10 per share

debit credit

Cash 80,000 Common stock 8,000 Additional paid-in capital

72,000

2. Issuance of common stock with no par value

Entity B issued 7,000 shares of common stockNo par valueIssue price = $20 per share

debit credit

Cash 140,000 Common stock 140,000

Retained earnings

1. Net income is added to retained earningsEnding retained earnings = Beginning retained earnings + Net income

2. Dividends decrease retained earningsEnding retained earnings = Beginning retained earnings + Net income - Dividends declared

Practice Questions

1. Dividends are declaredEntity C has 500,000 shares of common stock outstanding--> and declared $3 per share dividends

debit credit

Retained earnings 150,000 Dividends payable 150,000

2. Entity D had $230,000 balance of retained earnings as of December 31, 2009.During 2010, Entity D earned $60,000 net income and declared $15,000 dividends.What is the ending balance of retained earnings as of December 31, 2010?

Ending retained earnings= Beginning retained earnings + Net income - Dividends declared= $230,000 + $60,000 - $15,000 = $275,000

Examples of equity accounts

Common stock

Preferred stock Additional paid-in capital Retained earnings

Accounting Equation 01

Basic form of an equation --> Left side = Right side

1. Balance Sheet VersionAssets = Liabilities + Equity

2. Income Statement Version

Net Income = Revenue - Expenses

3. Combined VersionAssets = Liabilities + Equity---> Equity = Beginning Equity + Net Income

Assets = Liabilities + Beginning Equity + Net Income---> Net Income = Revenue - Expenses

Assets = Liabilities + Beginning Equity + Revenue - Expenses

An Example of Combined Version

At January 1, 2010, the balance of equity was $100,000.During the year of 2010, revenue and expenses were as followsRevenue = $300,000Expenses = $240,000

What is the balance of equity at December 31, 2010?

Equity = Beginning Equity + Revenue - Expenses--> $100,000 + $300,000 - $240,000 = $160,000

At December 31, 2010, Entity A had the following balancesAssets = $280,000Liabilities = $120,000Equity = $160,000

Balance sheet versionAssets = Liabilities + Equity--> $280,000 = $120,000 + $160,000

Combined versionAssets = Liabilities + Beginning Equity + Revenue - Expenses--> $280,000 = $120,000 + $100,000 + $300,000 - $240,000

Cases and Practice Questions

Case 1:

Assets = $12,000Liabilities = $5,000Equity = $7,000Assets = Liabilities + Equity$12,000 = $5,000 + $7,000

Practice Question 1:

If Assets = $12,000 and Liabilities = $3,000what is the amount of equity?

--> Equity = Assets - Liabilities = $12,000 - $3,000 = $9,000

Case 2:

Revenue = $16,000Expenses = $10,000Net income = Revenue - Expenses = $16,000 - $10,000 = $6,000


If Revenue = $16,000 and Expenses = $11,000what is the amount of net income?

--> Net income = Revenue - Expenses = $16,000 - $11,000 = $5,000

Case 3:

Assets = $25,000Liabilities = $11,000Beginning Equity = $10,000Revenue = $36,000Expenses = $32,000Assets = Liabilities + Beginning Equity + Revenue - Expenses$25,000 = $11,000 + $10,000 + $36,000 - $32,000


In the following case, what is the amount of Beginning EquityAssets = $55,000Liabilities = $21,000Revenue = $76,000Expenses = $62,000Beginning Equity = ?

Assets = Liabilities + Beginning Equity + Revenue - Expenses$55,000 = $21,000 + ? + $76,000 - $62,000--> Beginning Equity = ? = $20,000

The following accounts have normal balances on the debit side

1. Asset accounts2. Expense and loss accounts

Increases and decreases 1. Increases in asset accounts are recorded on the debit side2. Decreases in asset accounts are recorded on the credit side 3. Increases in expense and loss accounts are recorded on the debit side

4. Decreases in expense and loss accounts are recorded on the credit side

Examples of asset accounts

Cash and cash equivalents

Accounts receivable Notes receivable Interest receivable Rent receivable Inventories Merchandise Raw materials Work-in-process Finished goods Supplies Prepaid expenses Prepaid rent expense Prepaid insurance expense Prepaid interest expense Investment in debt and equity securities Trading securities Available-for-sale securities Held-to-maturity securities Property, plant and equipment Land Buildings Equipment Machinery Capitalized leases Leasehold improvements Intangible assets Goodwill Trademarks Patents

Examples of expense and loss accounts

Cost of goods sold

Selling, general and administrative expenses

Salaries expense Advertising expense Rent expense Travel expense Communication expense Insurance expense Supplies expense Utilities expense Depreciation expense Other expenses and losses Interest expense Loss on disposal of equipment Income tax expense

Trial Balance

If the journal entries are error-free and were posted properly to the general ledger, the total of all of the debit balances should equal the total of all of the credit balances. If the debits do not equal the credits, then an error has occurred somewhere in the process. The total of the accounts on the debit and credit side is referred to as the trial balance.

To calculate the trial balance, first determine the balance of each general ledger account as shown in the following example:

General Ledger

Cash

Sep 1 7500 17 400 25 425

Sep 15 1000 28 500

Bal. 6825

Accounts Receivable

Sep 17 700 Sep 25 425

Bal. 275

Parts Inventory

Sep 8 2500 Sep 18 275

Accounts Payable

Sep 28 500 Sep 8 2500

Bal. 2225 Bal. 2000

Capital

Sep 1 7500

Bal. 7500

Revenue

Sep 17 1100

Bal. 1100

Expenses

Sep 15 1000Sep 18 275

Bal. 1275

Once the account balances are known, the trial balance can be calculated as shown:

Trial Balance

Account Title Debits Credits

Cash 6825

Accounts Receivable

275

Parts Inventory 2225

Accounts Payable 2000

Capital 7500

Revenue 1100

Expenses 1275

10600 10600

In this example, the debits and credits balance. This result does not guarantee that there are no errors. For example, the trial balance would not catch the following types of errors:

Transactions that were not recorded in the journal Transactions recorded in the wrong accounts Transactions for which the debit and credit were transposed Neglecting to post a journal entry to the ledger

If the trial balance is not in balance, then an error has been made somewhere in the accounting process. The following is listing of common errors that would result in an unbalanced trial balance; this listing can be used to assist in isolating the cause of the imbalance.

Summation error for the debits and credits of the trial balance Error transferring the ledger account balances to the trial balance columns

o Error in numeric valueo Error in transferring a debit or credit to the proper columno Omission of an account

Error in the calculation of a ledger account balance Error in posting a journal entry to the ledger

o Error in numeric valueo Error in posting a debit or credit to the proper column

Error in the journal entry o Error in a numeric valueo Omission of part of a compound journal entry

The more often that the trial balance is calculated during the accounting cycle, the easier it is to isolate any errors; more frequent trial balance calculations narrow the time frame in which an error might have occurred, resulting in fewer transactions through which to search.

How To Solve Difficult Adjustments And Journal Entries In Financial Accounts - Presentation Transcript

1. How to solve difficult adjustments in Financial Accounts By Professors Augustin Amaladas and Shanthi Augustin M.Com(Loyola, Chennai)., AICWA These slides Are prepared Only to Clarify major Doubts To students And staff. Only Difficult Adjustments are explained Exclusively to CA ICWA,CS Students or others who wants to learn Accounts thoroughly CA CPT, ICWA entrance,ACS entrance students should read this Alternative work is rest

2. Why does Equity shares and fixed assets appear first in the Balance sheet o The balance sheet is prepared in order. Left hand side liabilities and right hand side

Assets. If business comes to an end the liability which is paid last is share capital. The last asset which is sold out will be fixed asset. Among fixed assets goodwill(good name) is sold out last.No one wants to sell one’s name unless everything is lost.The order of arrangement is known as order of permanence.

o What is the Order of Liquidity? 3. Order of Liquidity?

o The liability which is disposed off first comes first in the balance sheet. The asset which is used to pay liability first appears first in the assets side.

o Therefore cash appears first in the balance sheet asset side. And Creditors should appear in the liability side first.

o The above two orders are known as marshalling 4. Income tax paid by sole proprietor and partnership business-Journal entry?

o Income tax does not recognise sole proprietor or firm as a unit but the individuals who run the organisation are recognised.

o Income tax is a direct tax. Direct taxes such as Income tax, wealth tax are to be paid by the individual who runs such organisation.It is a personal liability even such incomes from business.

o If business money is used for personal use of paying tax, then such payment to be treated as drawings.

o Journal entry: Debit drawings and credit Cash. o Note: do not debit incometax account. o If you debit income tax account it means that its treated as business expenditure. It is

wrong in this case. 5. If Income tax paid by company?

o Company is a separate legal entity.The payment of tax is the liability of the company. It is not the liability of Shareholders. SHARE HOLDERS ARE DIFFERENT FROM COMPANY.

o It is a business expenditure. o Journal entry: Debit Income tax account and credit Cash account.

6. How do you deal indirect taxes? o Indirect taxes such as sales tax, excise duty, Octroi duty, import duty, export duty are

actually imposed on the individual who buys such article. It is not the responsibility of the individuals who run the business but by the business itself. It is a business expenditure.

o Journal entry: Debit sales tax a/c Credit cash a/c 7. 5.Double entry / Single entry

o Is Accounting based on business concept or religious concept? 8. It is based on religious concept

o Giving first and receiving later. o Giving cash receiving machinery o God is an accountant for every business. Who ever gives given credit.whoever receives

given debit. What ever goes out of you to be credited because god will reward you.What ever comes to you is given debit because god will take away from you.

o Giving is right hand function.Receiving is left hand function. 9. Rules of acccounting

o Personal rule/Account-supplier debtors, owner, banker, outstanding wages o Real rule/Account- cash, bank, building, furniture, goodwill, patent rights o Nominal rule/account: income and expenditure: salary, rent , insurance, commission,

internet expenses, cell phone expenses. 10. Personal rule

o Debit the receiver o credit the giver o Example: Computer chips purchased on credit from wipro o Here credit Wipro as Wipro is the giver of computer. o Sold goods to Meena o Meena is the receiver-debit

11. Exercise o 1.Amount collected from debtors? o 2.Amount deposited to bank? o Answer 1: two accounts to be selected.A) cash because it comes in B) debtors given

money.The giver to be given credit- PERSONAL RULE. o Cash related to real rule because we can see.

o Therefore Journal entry Is: Debit cash, credit o debtors. o 2. Banker is the receiver –related to personal rule therefore debit bank. Cash goes out –

related to real rule-credit cash. 12. Real rule

o These are the accounts of assets and liabilities o Rule: debit what comes in

Credit what goes out 13. Excercise

o 1.Goods supplied for cash o 2.Cash withdrawn from bank o 3.Cash withdrawn from bank for personal use o 4.Land purchased by giving a cheque o 5.Building sold on credit 14.o Answer: 1.Goods and cash are two accounts required. Person who supplied is not

important as it is a cash transaction.Both are related to real rule. o JE: Goods A/c debit o Cash A/c credit o 2.Cash and bank are two accounts. Both are related to real rule. o JE: Cash a/c debit o Bank a/c credit o Note: Cash withdrawn does not mean drawings.Only when cash withdrawn for personal

use we consider it as drawings. 15.o 5. Building sold on credit. o He is not a dealer in building.If he is not a dealer in building we can not consider it as

goods. Only when they are goods they can be taken to sale(Revenue income) otherwise they should be removed from capital expenditure.

o JE:The person who buys a/c debit o Building account credit. 16.o 3. Cash with drawn for personal use:owner and cash is important. Owner is personal

rule and cash is related to real rule.Debit the receiver, therefore debit drawings and credit bank as banker is the giver of cash.

o JE: Drawings a/c debit o Bank a/c credit o 4.Land purchased by giving a cheque: o Land and bank are two important.Both are related to real rule. Debit what comes in and

credit what goes out. o JE: Land A/c debit o bank A/c credit

17. Nominal rule o Related to Expenses and income o Rule: Debit all expenses and losses o Credit all incomes and gains

18. Exercise

o Rent paid Rs 50,000(Rent debit and cash credit) o Wages paid Rs.1,00,000(wages debit and cash credit) o Wages outstanding-Rs.60,000(wages a/c debit and outstanding wages to Mr.X to be

credited) o Commission received-25,000(Cash A/c debit and commission a/c to be credited) o Discount allowed to customer – Rs.1,000(Discount is related to nominal rule.debit

discount and credit debtors who had given cash) o Telephone bills paid-Rs.2500(Telephone a/c debit and cash to be credited) o Shares issued at premium-Rs.2,00,000(Cash a/c debit and share premium to be credited

as it belongs to nominal rule) 19. Suitable questions to pass journal entry

o If cash transaction, person is not important o Every birth of an account there is a death of the account o Ask what comes in? o Or what goes out?

20. What is the journal entry for bad debts? o Bad debt a/c debit o to debtors a/c o Bad debt follows nominal rule. Debit all expenses and losses and credit all income and

gains. o Debtors account follow personal rule. Debit the receiver and credit the giver.

21. Journal entry for provision for bad and doubtful debts? o Profit and loss account Debit o credit provision for bad and doubtful debts o Reasons:- All provisions are taken out of profits. It means profit is reduced and provision

to be increased. All provisions are future expected liabilities. 22. Rent and rent outstanding exp

o JE: Rent debit and cash credit o Rent outstanding: o Rent debit and rent outstanding to some one(say Mr.X )credit. o Rent appears in the profit and loss account debit side o Rent outstanding appears in the balance sheet under the head current liabilities.

23. What is contingent liability? o Liability which may or may not happen depends on the future situations o Example:1. Court case against the company o 2. contract yet to be completed. o No journal entry as it is not a real liability on the date of balance sheet.

24. Final Accounts Adjustments o Domestic house hold Expenses(Drawings a/c debit and cash credit) o Income tax refund( It is a personal income.If it is taken to the business then cash a/c

debit and capital a/c credit) o Income from house property( cash a/c debit and capital credit) as personal income has

been taken to business. o Un expired insurance(Unexpired insurance debit(asset) insurance premium a/c credit) 25.o Income received in Advance(It is a liability.debit income a/c and credit income received

in advance a/c credit)

o Interest on Capital( it is an expenditure. Interest on capital a/c debit and capital account credit)

o Provision on Doubtful debts(Profit and loss a/c debit and provision for bad and doubtful debts credit)

26.o provision for Discount on debtor( Profit and loss account debit and provision for

discount on debtors credit)It is because all provisions are taken from profit and loss account.

o Deferred revenue expenditure((HUGE Revenue expenditure incurred during the current year but can not be treated as one year expenditure as the benefit will come for more than a year.)

o JE: Deferred revenue expenditure a/c debit and cash to be credited. 27. Final Accounts Adjustments

o Reserve Fund( all reserves taken from profit. debit profit and loss a/c and credit Reserve fund)

o Goods Distributed as free sample( goods with drawn other than trading activity: Advertisement a/c debit and purchase a/c credit)

o Manager’s Commission( he is entitled to receive commission. Therefore: Manager’s commission a/c debit and Outstanding commission a/c credit.

28. Bad debts written off recovered o Once bad debts written off means that it is completely removed from debtors and

transferred to profit and loss account as a loss.There is no such account is seen any where in the books.

o If recovered such recovery does not affect debtors but affects profit and loss account o JE: Cash a/c debit o Bad debts recovery or profit and loss a/c credit

29. Goods destroyed due to fire and insurance company partly accepted o Goods which are meant for trading destroyed. Operating activity becomes non

operating activity or extraordinary activity. o JE: Insurance company a/c debit(like a debtor or asset) o loss of stock a/c debit o Trading a/c or purchase account

30. What do you mean by adjustment accounting point of view? o It means pass a fresh journal entry. o It means any item appears in the trial balance means that we had already passed journal

entry. That is why such items appear only once in the final account. o Since we pass journal entry for adjustments they appear twice in the final accounts. o The head of the account is important when you pass a fresh journal entry for

adjustments.Example:rent outstanding means rent account. Insurance prepaid means insurance account, interest due means interest account,

31. If closing stock appears in trial balance where should appear in the final accounts? o If it appears in the trial balance means we had passed journal entry for such stock and

adjusted with purchases to calculate cost of goods sold. Therefore it should not appear in the trading account. Being an asset it should appear in the Balance sheet.

32. Out standing expenses(rent) given in the trial balance? o It means it is already journal entry passed and adjusted with rent account(added to

rent)

o Do not adjust with rent in profit and loss account. o Take such item to balance sheet as a liability.

33. How do you deal advanced income tax paid by proprietor? o Income tax paid itself is considered as drawings, therefore advanced income tax also to

be considered as drawings onle o JE: Drawings a/c debit and cash a/c to be credited.

34. Bad debts given in the trial balance? o It means journal entry was passed and adjusted against debtors(head). Do not adjust

such bad debts against debtors in the balance sheet. o As a loss it should appear in the profit and loss account. o If such bad debt is given in the adjustments? 35.o It means pass a fresh journal entry for the new bad debt and to be adjusted with the

head of such account(Debtors). o Reduce such bad debt from debtors in the balance sheet before calculating provision for

bad and doubtful debts. o As a new bad debt add to the existing bad debts which is given in the trial balance which

will appear in the profit and loss account. 36. Do we deduct discount allowed given in the adjustment from debtors before calculating

provision for bad and doubtful debts? o Yes. It is because it is given in the adjustment and also it is certain that such debtors

already gone out of books of debtors. There is no doubts about it. The provision is always calculated only on debtors who are shaky.

37. If goods sent out on Higher purchase how do you deal? o If on the balance sheet date if such goods are with the customer divide the goods into

two

Cost Profit Add to Closing stock in trading a/c and Balance sheet + = Debtors Reduce from debtors

38. What is the JE when goods are received by consignee from consignor? o No journal entry. Why? o Owner ship is not transferred from consignor to consignee. Even though the goods are

physically in the hands of consignee but there is no transfer of goods taken place from consignor to consignee.Owner ship should be transferred to pass journal entry.

o The concept is that one person can not transfer to oneself . 39. When branch sends goods to head office or vice versa, what is the journal entry?

o No journal entry as ownership is not transferred.In fact there can not be any sales tax, income tax.

o One person can not earn profit by transferring to one self.Unless goods are transferred to third party no profits can be realised.

40. If sales return given in the adjustment? o It means we have to pass a fresh journal entry. o JE: Sales a/c Debit o Debtors account credit o We have to reduce sales and debtors once goods are returned.

41. What is the JE when normal loss occur?

o No Journal entry. Why. o Cost per unit will be inflated.You make customer to bear the total cost. o If abnormal loss occurs why do we pass journal entry? o It is because some portion will be recovered from insurance and some portion will be

the loss to be written of against profit. 42.o If you are satisfied please send SMS to others to share your joy. o Send your comments to the following address. Periodically I come out with other

topics.See my web periodically. o [email_address]

Accounting For Non Commerce Students Introduction To Accounting

New1 accountancy notes www.webaccountsguru.com accounting for management

How To Rectify Errors In Financial Accounts - Presentation Transcript

1. ST. Joseph’s College of Commerce, Bangalore presents to global students community RECTIFICATION OF ERRORS IN FINANCIAL ACCOUNTS Alternative work is rest All teachers Who teach Accounts At all levels CA-CPT ICWA Company secretary Sit, relax and enjoy Learn, unlearn and re-learn

2. How to Rectify Errors in Financial Accounts By Prof. Augustin Amaladas M.Com(Loyola college, Chennai),AICWA., PGDFM.,B.Ed. Simple to Tough errors and their rectifications Useful to CPT, ICWA,CS Students Useful To lecturers Who enter Into Teaching profession Alternative work is rest by S.L.Swamy

3. Dedicated to Prof.Dr. Victor Louis Anthuvan (St. Joseph’s College, Trichy) Sir made us to learn in a simple way My guru-Thank you sir. Dr. Abdul Kalam ex president Studied in St. Joseph’s College- Trichy Made the nation proud of. Dedicated to Rahul Dravid SJCC, Bangalore (Indian cricket captain)our student and my student.

4. Let us under stand the basic rules, concepts and conventions o Understanding basic rules of accounting, concepts and conventions help you to under

stand the rectification of errors better. 5. 1.concepts& conventions

o Meaning: Basic assumptions upon which the basic process of accounting based. o a] Business entity concept- o b] Dual aspect concept o c] Going concern concept o d] Accounting period concept o e] Cost concept o f] Money measurement concept o g] Matching Concept

Conventions Coservativism Materiality Consistency

6. a] Business entity concept- o Business is different from the owner o We pass Journal entry when owner contributes towards capital. o When amount / goods withdrawn for personal use we make an entry in the business o When Income tax paid by the owner out of business money we make an entry In the

books of accounts. 7. b] Dual aspect concept

o Every debit has equal amount of credit o Asset =Liability o Liability creates asset o If asset>Liability= profit o If Liability> Assets= loss

8. c] Going concern concept o Business will go for at least for a reasonable period. o Depreciation is provided based on this assumption. o If this assumption is not made all Fixed assets will be valued at realised value like current

assets. 9. d] Accounting period concept

o Fixing time limit for accounts o Profit for the period o It can be one week or two week or 6 months/one year or 5 years o But to find profit we normally consider 12 months period o Financial year for income tax point of view 1 st April-31 st March of the following year o Calendar year –January to December o Dipavali to Dipavali

10. e] Cost concept o The cost to the organisation (Actual) is recorded in the books o Assets are not recorded according to the market price every year. o Depreciation is calculated on cost not based on market price o Accounting records may not show the real worth of the business o Market price may be disclosed with in bracket in the balance sheet

11. f] Money measurement concept o Every thing which can be expressed in terms of Money is recorded in the books o Beautiful women are working /Handsome boys working in TEC /Efficient engineers

worth Rs.5000 crores –How do you record?. o Good working environment? o Highly motivated employees? o Qualitative information are not accounted.

12. Answer o We do not have record for qualitative aspects. They can enter this transaction under

Human resource accounting rather than financial accounting. 13. g] Matching Concept

o Matching Cost with revenue

o It is used to estimate correct profits o Accrual/ cash basis of accounting

Even cash paid /received if it belongs to accounting period we consider them as expenditure /income

Salary outstanding for the last month? Income from Investments yet to be received? Rent received in advance for next year? Salary outstanding for the last month to be considered as expense of the

current year under accrual basis of accounting. 14. Matching concept- continues

o Income from investment yet to be received to be considered for the current year as it belongs to current year.The year of receipt is not important.

o Rent received in advance does not belong to current year under accrual method of accounting as it belongs to next year even though it is received during the current accounting year.

15. Conventions o Customs and traditions that are followed by the accountants while preparing the

financial statements. o Why do we respect elders? o Why do we shake hands? o Why do Young Indians hate receiving dowry? o Why do students come late to class? o Why do Indians work hard?

16. Coservativism o To be on the safer side o Expect future losses as current year loss o But future income is not treated as current year income. o Stock is valued cost price / market price which ever is lower o Making provision for bad debts is based on this assumptions.

17. Materiality o Material impact on profitability are considered o Insignificant transactions ignored from recording o Pen purchased, pencil purchased? o It comes under stationary. It can not be disclosed(Shown) separately like pen account or

pencil account. 18. Consistency

o Accounting policies and procedures should be followed consistently o Method of depreciation should be followed consistently. o Stock valuation- cost/market price whichever is lower is consistently followed o If not followed it amounts to change in the policy of the company

19. 2.system of accounting (26) o 1.Cash system: o unless cash received /paid in the accounting year can not be considered as

income/expenses respectively 20. 2.Mercantile

o Mercantile/Accrual/due concept:

o Even cash received/paid but due for payment/due for receipt (yet to be received/payable) if they belong to current accounting year are considered.

o If last year expenditure paid this year? o If you receive/paid in advance ? o If last year expense paid during the current year can not be considered as current year

expenditure.In the same way any income received in advance at the end of current year should not be entered as current year income or expenditure.

21. 3.Types of Expenditure o A) Capital expenditure o B) Revenue expenditure o C) Deferred Revenue expenditure

22. A) Capital expenditure(30) o Expenditure incurred which will : o Increase Production capacity o Increase earning capacity o Reduction in the cost of operation. o Example: purchase of fixed assets o Purchase of Machinery o purchase of investment o If such expenditure is not to do with the basic functions of the business such

expenditure is capital expenditure. o How do you consider if you buy goodwill, copy right or patent right?

23. Capital expenditure-continue(page-30) o Both tangible and intangible assets included o Intangible assets such as patent right, copy right, technical know-how, franchises,

goodwill etc., o Depreciation is provided on fixed assets. Depreciation appears in the profit and loss

account o The asset appears in the Balance sheet (after deducting depreciation) o The life is more than one year o They should not appear in the profit and loss account

24. Revenue Expenditure o Expenditure incurred which will : o Not Increase Production capacity o Not Increase earning capacity o maintain the capacity o No Depreciation is provided on current assets which will appear in the profit and loss

account o They appear in the profit and loss account o The life is not more than one year o They should not appear in the balance sheet

25. Wrong treatment? o When goods purchased(dealer in such goods) it is a revenue expenditure. It should

appear either in the trading account or profit and loss account. o If it appears as an asset , then you inflate the profits which gives a wrong profit to the

firm.It also affects the assets(over stated) which gives over stated financial position. 26.

o Example: o Your father purchased 20 kg rice bag costing Rs.600 and your mother purchased a fridge

for Rs. 15000 on the same day.Rise is to be treated as monthly expenditure where as fridge to be treated as long term expenditure(Capital expenditure).

o Instead, if such purchase of rice accounted with fridge it means monthly expenditure decreased and long term expenditure is increased.

o Accounting point of view rice goes to trading account to find out cost of the month and fridge goes to Balance Sheet on the asset side as a part of asset.

27. o Suppose fridge cost is added with rice, then your monthly expenditure will be high and

asset account is reduced. o The indirect impact is that depreciation would not have been provided on such asset as

it is included with revenue(Rise)account which affects profits. o Example-2: o Building purchased for Rs.20,00,000 entered into purchase account.Building depreciates

by 10% under straight line method. 28. o Here it is entered into purchase account. It means you are treating it as goods(dealer in

real estate) which is a revenue expenditure instead of capital expenditure.Your profit is less by Rs. 20,00,000. But had been entered into building account the profit would have been more by Rs.20,00,000.

o Because it is entered in the purchase account we had forgotten to provide depreciation of Rs.2,00,000 which should had been done.

o Net effect to rectify the error is:- Increase the profits by Rs.18,00,000. And increase the asset should be increased by 18,00,000.

29. Suppose you are a dealer in building(Real estate) o Purchase of building is considered as goods(dealer in building).The entry made in

purchase account is correct. No need to rectify such transaction. o Suppose you buy furniture(dealer) for Rs.20000 entered into furniture account.What is

the effect? How do you rectify? 30. o Here the mistake is that revenue expenditure is treated as capital expenditure.The

correct journal entry is Purchase a/c debit and cash a/c credit. o Wrong entry is: Furniture a/c debit and cash is credited. o In the absence of information we assume the mistake with respect to furniture and

purchase but there is no mistake with respect to cash account because cash payment is correct.

31. Deferred revenue expenditure(page-30) o Deferred means- postponed o Heavy revenue expenditure o Vodafone incurred 200 crores for advertisement after merger with Hutch o It can not be written off within a year o It appears in the balance sheet as last item o Every year some amount is written off in the profit and loss account. o Research and development expenditure, initial advertisement expenditure, preliminary

expenditure are example 32. 5.Double entry / Single entry

o Is Accounting based on business concept or religious concept? o Giving first and receiving later. o Giving cash receiving machinery o We consider both aspects such as debit and credit

33. Rules of accounting o Personal rule/Account-supplier debtors, owner, banker, outstanding wages o Real rule/Account- cash, bank, building, furniture, goodwill, patent rights o Nominal rule/account: income and expenditure: salary, rent , insurance, commission,

internet expenses, cell phone expenses. 34. Personal rule

o Debit the receiver o credit the giver o Example: Computer chips purchased on credit from wipro o Here credit Wipro as Wipro is the giver of computer. o Sold goods to Meena o Meena is the receiver-debit

35. Exercise o Amount collected from debtors? o Amount deposited to bank? o Amount collected from debtor: Cash and debtor are important.Cash is related to real

rule o Debit what comes in and credit what goes out o Therefore cash to be debited and debtors belong to personal rule.Credit the giver.

Therefore credit debtor account. o Cash deposited to bank : JE: Bank a/c debit and cash to be credited.

36. Real rule o These are the accounts of assets and liabilities o Rule: debit what comes in

Credit what goes out 37. Nominal rule

o Related to Expenses and income o Rule: Debit all expenses and losses o Credit all incomes and gains

38. Suitable questions to pass journal entry o If cash transaction, person is not important o Every birth of an account there is a death of the account o Ask what comes in? o Or what goes out?

39. Let us pass Correct Journal entries for a few transactions o General rules:- All assets are debited if it comes to business(when you buy for business) o All liabilities are credited when borrowed. o All expenses are debited and All income and gains are credited. o If it is a credit transaction person is important. If it is a cash transaction person is not

important.(like cash purchase or cash sales) 40. Pass Journal entries

o 1. Capital introduced by owner Rs. 20 lakhs. o Answer :

o Business point of view owner is different from business. Business receives cash and the giver is owner.

o JE : Cash a/c debit(Real rule) o Capital a/c credit(Personal rule)

41. 2. o Borrowed loan Rs. 10,00,000 o Answer : o Cash comes to business and loan vendor account is important. o JE : Cash a/c debit(Real rule) o Loan a/c credit(Personal rule)

42. 3. o Company issues Shares to public Rs.50,00,000. o Answer: o Cash comes to business. Many owners given this money. o JE : Cash a/c debit (Real rule) o Share capital a/c credit(Personal rule)

43. 4. o Partners contributed capital to business: A Rs.55,00,000 cash and B Rs.19,00,000 in

cash, building worth Rs.50,00,000, furniture worth Rs.25,00,000 and his good will Rs.10,00,000 .

o Answer: o JE : 1.Cash a/c debit Rs.55,00,000(Real rule) o A’s Capital a/c credit Rs. 55,00,000 o (personal rule) o 2. Cash a/c debit Rs.19,00,000(Real rule) o Building a/c debit Rs. 50,00,000(Real rule) o Furniture a/c debit Rs. 25,00,000(Real rule) o Good will a/c debit Rs. 10,00,000(Real rule) B’s Capital credit Rs.104,00,000 o (Personal Rule) o Here cash, building, furniture and good will are assets coming to business therefore

debited.The giver is B therefore credited. 44. o Share broker purchased shares Rs. 25,00,000. Answer: o Shares are coming to business. First understand the nature of business. Being a share

broker shares are considered as goods(a revenue expenditure). Goods are purchased for cash.

o JE : Purchase of goods a/c debit Rs.25,00,000 o (Real rule) o Cash a/c credit Rs.25,00,000 o (Real rule)

5

45. o Infosys buy shares of Wipro Rs.20,00,000 for cash . o Answer:

o Here Infosys is not a dealer in shares. It is a capital expenditure. It is not goods. It is a cash transaction.

o JE : Investments a/c debit Rs.20,00,000(Real rule) o Cash(Bank) a/c credit Rs.20,00,000 o (Real rule)

6.

46. o Debentures issued by ICICI Bank for Rs.1 crore. o Answer: o ICICI point of view, it is a loan.Cash collected. o JE : Cash a/c debit Rs.1 crore(Real rule) o Debenture a/c credit rs. 1 crore o (personal rule)

7.

47. o Building acquired by Wipro by issue of shares Rs.20,00,00,000. o Answer: o It is a capital expenditure.Here no cash paid but given shares.The person who supplied

shares are share holders(owners) o JE : Building a/c debit Rs. 20 crores(Real rule) o Share capital a/c Rs.20 crores(personal rule) o Note: share capital does not come under real rule but share capital belongs to person

who owns them.

8

48. o Shares of Wipro limited held by Infosys sold for Rs.25,00,000. o Answer: o The investments sold; the capital receipt. When ever we use the term ‘sales account’ it

indicates the goods that the company deal. o JE: Cash a/c debit Rs.25,00,000(real rule ) Investments a/c credit Rs. 20,00,000 o (Real rule) o Profit on sale of investment a/c credit Rs.5,00,000 o (Nominal rule)

9

49. o Salary paid to Kumaran Rs.50,000 o Answer:

o Salary paid for services rendered by Kumaran.Kumaran is not a creditor. Salary is an expenditure.

o JE : Salary a/c debit 50,000 o Cash a/c credit Rs.50,000 o If we enter into Kumeran account by using personal rule, kumeran account were to be

opened.How do you close his account? Salary is important rater than Kumeran.If you cannot close any time during the life of the company do not open such account. In the same way rent paid to land lord can not be entered into land lord account.Instead it should be entered in the rent account.

10

50. o Depreciation provided on Plant and Machinery Rs.2,00,000. o Answer: o Depreciation is a non cash account. There are many transactions are non cash items. It is

an expenditure as there is a reduction in the value of asset. o JE: Depreciation a/c Debit Rs.2,00,000(Nominal) o Plant and Machinery a/c Rs.2,00,000 o (Real rule)-goes out o Note: Plant and Machinery account goes out year after year when we provide

depreciation. The capital expenditure slowly becomes a revenue expenditure when we provide depreciation.

11

51. o Company declared dividend Rs. 20,00,000 o Answer: o Dividend is an appropriation of profit.It is not an expenditure because it is a share of

profits.In order to compute profit we do not reduce dividend. o JE: Dividend a/c debit Rs. 20,00,000(Nominal rule) o Cash a/c credit Rs.20,00,000(Real rule)

12

52. o Interest paid on debentures/loan Rs. 1,00,000 o Answer: o Interest is a business expenditure as it is paid to third party. If paid to owner is not

considered as expenditure. o JE: Interest a/c debit Rs.1,00,000(Nominal rule) o Cash a/c credit Rs. 1,00,000(Real)

13

53. Rectification of Errors Before preparing Trial Balance After trial balance But before Trading, P/L and Balance sheet After preparing Trading and P/L and Balance sheet Hit the individual account Hit profit or reserve or Capital {do not bother about individual/nature Of expenditure} And hit the Balance sheet Only net balance if it affects Balance sheet www.augustin.co.nr

54. Basic rules for rectification-1 o If words used ‘ account’-means error only with respect to that individual account. o Example: wages paid Rs 50,000 not entered into wages account. o Here wages paid might have affected cash also, but the statement says that it is not

entered into wages account only. It does not mention about cash account. Therefore we assume that cash account had been entered correctly. Therefore rectify wages account only. It is one side error or one account error.

55. Basic rules for rectification-2 o Do not make too many assumptions. o Example: wages paid to install a machinery is entered into wages account. o Here you find wages account is treated as a revenue expenditure(Refer to the notes

earlier) but it is a capital expenditure. “ Any expenditure incurred before the asset is put into use to be capitalised”. What about cash account?

o We assume that cash account would have been correctly entered. (Continue in the next slide)

56. o You might ask which side of wage account had been entered, whether debit or credit? o Normal assumption is that wages always entered in the debit side(nominal rule). o Do not assume, had been entered into credit side of wages account what would have

happened- It is unnecessary assumption ( too much in your assumption ) o Ask question:whether one/ two accounts is/are affected? Here wages (wrongly entered)

but you should enter in the Building account now. o This is a normal assumption.

57. How do you rectify wages? o Building account to be debited Rs.50,000 o Wages account to be credited Rs.50000 o To remove wages from the account put it in the opposite side of that account. o Every account is born in one side ie debit or credit.All assets and expenditure accounts

are born in the debit side. If you want to kill it put it on the credit side. o In the same way liabilities and income accounts are born in the credit side. If you want

to kill it put it on the debit side. 58. Rectification rule-3

o Error to be rectified before the preparation of trial balance or after trial balance or after the preparation of Balance sheet.

o Before preparation of Balance sheet-Hit the individual account o After preparation on trading, profit and loss account and Balance sheet- reduce/increase

profit if it is an expense and if it affects asset/liability increase/decrease the net amount only.

59. Rectification of errors-Rule-4 o If one side error(one account) to fulfill the double entry book keeping we open suspense

account provided, trial balance is already prepared. o Example :- Salary paid to Ranganath not entered into salary account by Rs. 40,000

o The mistake is only in salary debit side because salary appears on the debit side. Cash account is correct(do not assume too much as I have stated earlier).

o Rectification entry : o Salary a/c debit Rs.40,000 o Suspense a/c credit Rs. 40,000.

60. Rectification of error-Rule 5 o Suspense account: Meaning o When trial balance does not tally(debit is not equal to credit) in order to close the trial

balance we open entirely a new account on the side of deficit.Such account is known as suspense account.

o Example:-next page 61. Example for suspense account

o Trial balance: Debit credit o Purchases 5000 - o Wages 3000 - o Sales - 10,000 o Building 4000 o Suspense account ??? 2000(CR)

Note: here suspense account is a credit balance as trial is not an account Since debit side of trial balance is more than credit side, suspense account is not a credit balance

62. o Omitted from book(s )means both debit and credit of such transactions are omitted. o Account means –omitted to enter into that specific account only( normally one side

error) o Example: purchases from Mr.Amal not entered in the purchase books Rs. 50,000 o Here this transaction is completely omitted as it is given the word books. o To rectify pass a fresh journal entry: o JE: debit purchase a/c Rs.50,000 o Credit Mr.Amal a/c Rs.50,000 o Suppose it is stated that not entered into the purchase account how do you rectify?

Rectification of error-Rule-6

63. o Here, the mistake is only in the purchase account. There is no mistake in Mr. Amal’s

account o Rectified entry is: o Purchase a/c debit Rs.50,000(real rule) o Suspense a/c credit Rs.50,000 o (fulfill double entry) o Note: normal assumption is that purchase is always debit. o If it is sales it is always credit. 64. o Rupees 1000 spent for repairs of building has been posted to building account. o Identify the mistake:

o Repairs 2. Building. o Repairs do not increase the capacity of building but to maintain the building. Therefore

it is a revenue expenditure but treated as capital expenditure. o Rectification : add to repairs and remove from building o Rectification entry : repairs a/c debit Rs.1000(real rule) o Building a/c credit Rs.1000 o (to remove from building a/c)

Exercise-1

65. o Sale of furniture Rs.20,000 entered in the Sales account. o Here he is not a furniture dealer. There fore sale of capital asset brings capital receipts.

It is treated as revenue receipts( like dealing in goods of furniture). o Rectification entry: o Sales a/c debit Rs.20,000 o (to remove from sale) o Furniture a/c Rs.20,000 o (to reduce furniture) o Note: sales normally credit and furniture is normally debit as asset.In order to kill put it

in the opposite side .

Exercise-2

66. o A sale of Rs.2000 to Min Min was credited to Min Min account . o Here the error with respect to Min Min account only.we assume that sales a/c is

correct(normal assumption as I have explained earlier) The normal Journal entry is : o MinMin a/c debit and Sales a/c credit. o But we have credited Min Min a/c instead of debit.To rectify such error double the

amount and put on the opposite side o Rectification entry : Min Min a/c debit Rs.4000 o (one 2000 for rectification and another to make actual entry o To suspense a/c credit Rs.4000

Exercise-3

67. o A purchase of Rs.6700 had been posted on the debit side of the creditor’s account as

Rs.7600 o Here mistake with respect to creditor only on the wrong side as creditors normally

appear on credit side(all liabilities appear on the credit side). o The second mistake is amount. o Method of rectification : Remove the wrong amount and post the correct amount on

the correct side. o Rectification entry : Suspense a/c debit Rs.14,300

o creditors a/c credit Rs.14,300 o (Rs. 7,600 is to remove wrong and Rs.6,700 to post correctly and suspense account is

opened to fulfill double entry as it is a one side error)

Exercise-4

68. o A sale of Rs.10,000 to Mr.Tim had been passed through the purchase day book. o Here the mistake is misunderstanding of transaction.Instead on sale treated as

purchase.The book means complete omission. o Rectification method : reverse sales and Tim to remove the mistake and post the correct

once again. o Rectification entry : 1. Tim A/c debit Rs.10,000 o Purchase a/c credit Rs.10,000 o (to remove the mistake put in the opposite side)

Exercise-5

69. o 2. To post the correct entry: o Tim a/c debit Rs. 10000 o credit sales a/c Rs.10,000 o Instead of passing two entries we can combine both the entries like this: o Debit Tim a/c Rs.20,000 o Credit purchases a/c Rs.10,000 o credit Sales a/c Rs.10,000

Exercise-5 continues

70. o Goods sold on Higher Purchase Rs.50,000 entered in the sales account after the

payment of first installment . o Here there is a technical error . The ownership is transferred only after the last

installment. In order to rectify remove from sale to the extent of sale price and add to stock to the extent of cost. Assume cost is Rs. 40,000.remove from debtors Rs.50,000

o Rectification entry : Sales a/c debit Rs. 50,000 o Stock a/c debit Rs.40,000 To Debtors a/c Credit Rs.50,000 o (To remove sales, debtors and added to stock)

Exercise-6

71. o Rectification after the preparation oft Trading and Profit and loss account and Balance

Sheet(after preparation of final books or financial statements) o Major repairs to renew the building Rs. 3,00,000 entered in the repairs account.

o Rectification: repairs appear in the Profit and Loss account and building appears in the Balance sheet

o To Rectify : Increase profit by Rs. 3,00,000 and add to building by Rs.3,00,000 in the balance sheet

o JE : Building a/c debit Rs. 3,00,000 o Profit and Loss a/c credit Rs. 3,00,000 o Assumtion : renewal done at the end of the year.Nature of expenditure is not important

to rectify after the preparation of final account.

Exercise-7

72. o Building purchase Rs. 40,00,000 entered in the Furniture a/c as Rs. 20,00,000.

Depreciation on building is 10%.Depreciation on Furniture is 30%.(Rectify after final accounts prepared)

o Both building and furniture fall in the balance sheet. But depreciation rates differ. It affects profit too.Depreciation on building is Rs.4,00,000 and depreciation on furniture is Rs.6,00,000.we had provided excess depreciation during the year, therefore profit should be increased.

o Furniture in the balance sheet to be reduced by Rs.14,00,000 and building to be increased by 36,00,000. ??? What is the rectification entry.

Exercise-8

73. Thank you very much Help your father in cooking Help your mother If you want to take rest Sweep your room Alternative Work is rest

74. Rectification entry? o Building a/c Debit Rs.36,00,000 o Furniture a/c credit Rs.14,00,000 o Profit and loss a/c Rs.2,00,000 o Suspense account credit Rs.20,00,000 o Note: Show net amount only.

Chart of Accounts

The chart of accounts is a listing of all the accounts in the general ledger, each account accompanied by a reference number. To set up a chart of accounts, one first needs to define the various accounts to be used by the business. Each account should have a number to identify it. For very small businesses, three digits may suffice for the account number, though more digits are highly desirable in order to allow for new accounts to be added as the business grows. With more digits, new accounts can be added while maintaining the logical order. Complex businesses may have thousands of accounts and require longer account reference numbers. It is worthwhile to put thought into assigning the account numbers in a logical way, and to follow any specific industry standards. An example of how the digits might be coded is shown in this list:

Account Numbering

Flag

1000 - 1999: asset accounts2000 - 2999: liability accounts3000 - 3999: equity accounts4000 - 4999: revenue accounts5000 - 5999: cost of goods sold6000 - 6999: expense accounts7000 - 7999: other revenue (for example, interest income)8000 - 8999: other expense (for example, income taxes)

By separating each account by several numbers, many new accounts can be added between any two while maintaining the logical order.

Defining Accounts

Different types of businesses will have different accounts. For example, to report the cost of goods sold a manufacturing business will have accounts for its various manufacturing costs whereas a retailer will have accounts for the purchase of its stock merchandise. Many industry associations publish recommended charts of accounts for their respective industries in order to establish a consistent standard of comparison among firms in their industry. Accounting software packages often come with a selection of predefined account charts for various types of businesses.

There is a trade-off between simplicity and the ability to make historical comparisons. Initially keeping the number of accounts to a minimum has the advantage of making the accounting system simple. Starting with a small number of accounts, as certain accounts acquired significant balances they would be split into smaller, more specific accounts. However, following this strategy makes it more difficult to generate consistent historical comparisons. For example, if the accounting system is set up with a miscellaneous expense account that later is broken into more detailed accounts, it then would be difficult to compare those detailed expenses with past expenses of the same type. In this respect, there is an advantage in organizing the chart of accounts with a higher initial level of detail.

Some accounts must be included due to tax reporting requirements. For example, in the U.S. the IRS requires that travel, entertainment, advertising, and several other expenses be tracked in individual accounts. One should check the appropriate tax regulations and generate a complete list of such required accounts.

Other accounts should be set up according to vendor. If the business has more than one checking account, for example, the chart of accounts might include an account for each of them.

Account Order

Balance sheet accounts tend to follow a standard that lists the most liquid assets first. Revenue and expense accounts tend to follow the standard of first listing the items most closely related to the operations of the business. For example, sales would be listed before non-operating income. In some cases, part or all of the expense accounts simply are listed in alphabetical order.

Sample Chart of Accounts

The following is an example of some of the accounts that might be included in a chart of accounts.

Sample Chart of Accounts

Asset Accounts

Current Assets

1000 Petty Cash

1010 Cash on Hand (e.g. in cash registers)

1020 Regular Checking Account

1030 Payroll Checking Account

1040 Savings Account

1050 Special Account

1060 Investments - Money Market

1070 Investments - Certificates of Deposit

1100 Accounts Receivable

1140 Other Receivables

1150 Allowance for Doubtful Accounts

1200 Raw Materials Inventory

1205 Supplies Inventory

1210 Work in Progress Inventory

1215 Finished Goods Inventory - Product #1



1400 Prepaid Expenses

1410 Employee Advances

1420 Notes Receivable - Current

1430 Prepaid Interest

1470 Other Current Assets

Fixed Assets

1500 Furniture and Fixtures

1510 Equipment

1520 Vehicles

1530 Other Depreciable Property

1540 Leasehold Improvements

1550 Buildings

1560 Building Improvements

1690 Land

1700 Accumulated Depreciation, Furniture and Fixtures

1710 Accumulated Depreciation, Equipment

1720 Accumulated Depreciation, Vehicles

1730 Accumulated Depreciation, Other

1740 Accumulated Depreciation, Leasehold

1750 Accumulated Depreciation, Buildings

1760 Accumulated Depreciation, Building Improvements

Other Assets

1900 Deposits

1910 Organization Costs

1915 Accumulated Amortization, Organization Costs

1920 Notes Receivable, Non-current

1990 Other Non-current Assets

Liability Accounts

Current Liabilities

2000 Accounts Payable

2300 Accrued Expenses

2310 Sales Tax Payable

2320 Wages Payable

2330 401-K Deductions Payable

2335 Health Insurance Payable

2340 Federal Payroll Taxes Payable

2350 FUTA Tax Payable

2360 State Payroll Taxes Payable

2370 SUTA Payable

2380 Local Payroll Taxes Payable

2390 Income Taxes Payable

2400 Other Taxes Payable

2410 Employee Benefits Payable

2420 Current Portion of Long-term Debt

2440 Deposits from Customers

2480 Other Current Liabilities

Long-term Liabilities

2700 Notes Payable

2702 Land Payable

2704 Equipment Payable

2706 Vehicles Payable

2708 Bank Loans Payable

2710 Deferred Revenue

2740 Other Long-term Liabilities

Equity Accounts

3010 Stated Capital

3020 Capital Surplus

3030 Retained Earnings

Revenue Accounts

4000 Product #1 Sales



4060 Interest Income

4080 Other Income

4540 Finance Charge Income

4550 Shipping Charges Reimbursed

4800 Sales Returns and Allowances

4900 Sales Discounts

Cost of Goods Sold

5000 Product #1 Cost



5050 Raw Material Purchases

5100 Direct Labor Costs

5150 Indirect Labor Costs

5200 Heat and Power

5250 Commissions

5300 Miscellaneous Factory Costs

5700 Cost of Goods Sold, Salaries and Wages

5730 Cost of Goods Sold, Contract Labor

5750 Cost of Goods Sold, Freight

5800 Cost of Goods Sold, Other

5850 Inventory Adjustments

5900 Purchase Returns and Allowances

5950 Purchase Discounts

Expenses

6000 Default Purchase Expense

6010 Advertising Expense

6050 Amortization Expense

6100 Auto Expenses

6150 Bad Debt Expense

6200 Bank Fees

6250 Cash Over and Short

6300 Charitable Contributions Expense

6350 Commissions and Fees Expense

6400 Depreciation Expense

6450 Dues and Subscriptions Expense

6500 Employee Benefit Expense, Health Insurance

6510 Employee Benefit Expense, Pension Plans

6520 Employee Benefit Expense, Profit Sharing Plan

6530 Employee Benefit Expense, Other

6550 Freight Expense

6600 Gifts Expense

6650 Income Tax Expense, Federal

6660 Income Tax Expense, State

6670 Income Tax Expense, Local

6700 Insurance Expense, Product Liability

6710 Insurance Expense, Vehicle

6750 Interest Expense

6800 Laundry and Dry Cleaning Expense

6850 Legal and Professional Expense

6900 Licenses Expense

6950 Loss on NSF Checks

7000 Maintenance Expense

7050 Meals and Entertainment Expense

7100 Office Expense

7200 Payroll Tax Expense

7250 Penalties and Fines Expense

7300 Other Taxes

7350 Postage Expense

7400 Rent or Lease Expense

7450 Repair and Maintenance Expense, Office

7460 Repair and Maintenance Expense, Vehicle

7550 Supplies Expense, Office

7600 Telephone Expense

7620 Training Expense

7650 Travel Expense

7700 Salaries Expense, Officers

7750 Wages Expense

7800 Utilities Expense

8900 Other Expense

9000 Gain/Loss on Sale of Assets

journal entry example

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